ASX takes on brokers and banks

ASX chief executive Elmer Funke Kupper: “The relationship between exchanges and banks around the world is being tested.”
Photo: Louise Kennerley

by
George Liondis | Nabila Ahmed

The Australian Securities Exchange has admitted that structural change sweeping the financial services sector is forcing it to compete more aggressively with investment banks and stockbrokers – its key customers – to combat a slowdown in earnings brought about by weaker sharemarket activity.

In an interview with The Australian Financial Review ahead of the
ASX
’s annual general meeting today, chief executive
Elmer Funke Kupper
said the competitive tension was testing the exchange’s relationship with banks and brokers.

The comments come amid simmering anger within investment banking and broking circles over the ASX’s plan to play a bigger role in company capital raisings and Mr Funke Kupper’s criticism of private “dark pool" exchanges.

“The relationship between exchanges and banks around the world is being tested," Mr Funke Kupper said. “The challenge, of course, for us and all our clients is that growth is hard to come by, because the world is a different and more difficult place."

Under a plan unveiled by the ASX last month, the exchange will allow the “bookbuild" process for company capital raising to be conducted on the market. The process, which involves allocated shares to investors to raise money for companies, has up until now been the domain of brokers.

not “getting into the business of investment banking"

Mr Funke Kupper was adamant that the ASX was not “getting into the business of investment banking", but agreed there would increasingly be competitive friction between the exchange and its clients.

Will Vicars, a funds manager with Caledonia, which has held big position in global exchanges including the ASX, said the local bourse and bankers were increasingly fighting it out for the same turf.

Related Quotes

Company Profile

“I think the ASX has got to try a lot of things because [trading] volumes are falling," he said. “Everyone is at war with each other. The investment banks are taking on exchanges as well."

In a wide-ranging interview, Mr Funke Kupper also took aim at the growing popularity of so-called dark pools operated by investment banks and brokers. Dark pools are alternative trading venues that allow fund managers and other sophisticated investors to trade shares between themselves away from the scrutiny of the open market. Mr Funke Kupper said dark pools now account for a quarter of sharemarket activity in Australia, robbing the ASX of a significant share of trading volumes.

Figures released yesterday showed the value of shares traded on the ASX slumped 28 per cent in September compared with the same month a year ago. Mr Funke Kupper said all trades worth less than $25,000 should be barred from dark pools to protect less experienced investors.

“Dark pools are private exchanges effectively that banks and brokers run to execute trades that would otherwise go to the market," Mr Funke Kupper said. “We don’t want to ban dark pools, but when it comes to dark pools we have to recognise that as a financial market we can never lose the quality of the market that is there for everyone."

Mr Funke Kupper’s comments frustrate some brokers who point out the ASX operates its own dark pool.

BATTLE TO PROTECT CLEARING MONOPOLY

Meanwhile, Mr Funke Kupper, who will celebrate his first anniversary as ASX chief tomorrow, is expected to use his address at today’s AGM in Sydney to step up his campaign against proposals to strip the ASX of its monopoly over clearing trades.

The ASX is the sole provider of clearing services in Australia, but financial regulators are finalising recommendations on whether this function should be opened up to competition. Mr Funke Kupper called for the decision to be delayed by three years, warning competition could pose significant risks to the financial system.

“You need to understand the risks and you need to make absolutely sure you can manage them and you need to make sure there is substantial benefit in this. I don’t think that is there," Mr Funke Kupper said. “Until we have clarity on how the euro zone is going to play out, until we have clarity on how international regulations will impact on our markets, until we have clarity on our position in Asia, we need to park this question."

READ NEXT:

ASX raises the stakes of competition – Elmer Funke Kupper might be coming up to his first anniversary as chief executive of the Australian Securities Exchange but don’t expect him to have too much time to pause and reflect.

Chanticleer – Two documents released yesterday help explain why ASX chief executive Elmer Funke Kupper is becoming increasingly aggressive in protecting his patch as well as seeking new ways of generating revenue.